To The Moon

Executive Summary

Pop Mart International Group Limited is a company based in China that specializes in the design, development, and distribution of trendy and innovative toys, collectibles and lifestyle products. They are well-known for their blind box or blind bag products, where customers purchase sealed boxes without knowing the specific item inside, adding an element of surprise to the purchase. Popmart has gained popularity for collaborating with various artists and designers to create unique and visually appealing collectibles. Their products often feature cute or stylized characters, and they have successfully tapped into the global market with a focus on pop culture and art.Its business model revolves around the creation, distribution, and sale of blind box toys and collectibles. The key elements of their business model are as follows:

1) Blind Box Concept: Popmart's main product offering involves selling blind boxes or blind bags, where customers purchase sealed packages without knowing the specific item inside. This element of surprise and unpredictability adds a sense of excitement and collectibility to their products.

2) Collaborations and Licensing: The company often collaborates with popular artists, designers, and intellectual properties to create unique and appealing collectibles. These collaborations enhance the diversity and attractiveness of their product range.

3) Limited Edition Releases: Popmart often releases limited edition or rare items to drive demand among collectors and enthusiasts.

4) Marketing and Branding: Popmart invests in marketing and branding to build recognition for their products. They often utilize social media, collaborations, and events to promote their brand and engage with their target audience.

5) Continuous Innovation: To stay relevant in the fast-paced world of collectibles, Popmartfocuses on continuous innovation in design and product development allowing them to attract new customers and retain the interest of existing ones.Revenue Drivers

1) Retail Stores (40%): Popmart has brick-and-mortar stores in 53 first-tier and second-tier cities across China, mostly located in mainstream commercial areas. These stores aim to offer the fullest stocks and also play a key role in promoting brand images and maintaining relations with consumers. Popmart is also expanding to North America, Europe, Australia, New Zealand and other parts of Asia.

2) Online Sales (41%): Popmart employed online marketing and social media advertising to reach a larger customer base. These customers are directed to the online shops, where they can purchase the figurines individually or in bulk.

3) Roboshops (9%): Located in shopping malls, cinemas and metro stations where human traffic is high, Popmart has installed a large number of automatic vending machines. With each machine stocking products worth RMB 50,000, most of them needed to be restocked every one or two days. In the most extreme case, a machine had to be restocked every hour. These machines provide crucial data for Popmart to find the most effective locations for its retail stores.

4) Wholesale (10%): When Popmart decided to enter Asian markets, such as South Korea, Japan and Singapore, the company adopted a wholesale model or operated as a joint venture. Such practices later boosted its confidence in facing consumers directly as a wholly-owned entity in the international market.

5) Theme Park (0%): Recently built in September 2023, Popland is Popmart’s very first theme park that is located in Beijing, China. It resembles a lively carnival and offers visitors a more extensive and immersive retail experience.

6) Mobile Game (0%): In 2024, Popmart is intending to release a mobile game that is reminiscent of Animal Crossing. This is a strategic move to diversify its revenue streams and bolster its intellectual properties (IPs) within the consumer market.

As 90% of the revenue has originated from Mainland China, Popmart has increased the number of overseas retail stores from 24 in 2022 to 55 in 2023 and increased the number of roboshops from 98 in 2022 to 143 in 2023.

The SkullPanda, Molly, and Dimoo series are Popmart’s original merchandise, which implies that a significant proportion of the sales are generated from the artworks of global artists. While these characters are highly adaptable, seamlessly integrating into a wide range of designs, they do not have a personal narrative, lack distinct personalities and relatability to the average consumer. In contrast, IPs such as Disney characters are often well received by the masses as they exhibit distinctive personalities and quirks. Consequently, original Popmart merchandise may have shorter product life spans as consumers tend to chase the next fad whenever a new series is released.

The cost of producing the blind box is low, with primary fixed costs stemming from IP licensing and mold opening expenses. A single mold costs approximately RMB 23 and is sold at a price of RMB 69, resulting in a gross profit rate of around 60%. This allows Popmart to capitalize on economies of scale, benefiting from lower costs and higher profit margins as the sales volume of blind boxes increases. Furthermore, the blind boxes exhibit a high repurchase rate, as consumers eagerly vying specific characters often anticipate their desired item in the next box. As a result, Pop Mart achieved an impressive 58% repurchase rate in 2019. Furthermore, the prices are marked up significantly in countries where consumers have higher disposable incomes. To further reduce operating expenses, Popmart has shifted its business model from retail stores to roboshops, particularly in regions where it has successfully established a brand presence, such as in Mainland China. In contrast to traditional retail stores, roboshops entail lower initial investment and maintenance costs while offering broader coverage. Therefore, Popmart has reduced its lease expenses from 2021 to 2022 by 8%.

Investment Thesis

1) Popmart is currently undervalued due to a decline in sales resulting from the economic downturn in the Chinese economy. Given that the majority of Popmart's revenue is derived from Mainland China, the stringent lockdown policies in 2022, along with the unfavorable economic outlook in 2023, have had an adverse impact on the company's top-line growth. The Chinese government implemented a zero-covid lockdown policy, which confined over 11 million residents to their homes. This negatively affected the sales of retail stores, which contribute to 40% of Popmart's revenue, and diminished the effectiveness of marketing efforts, consequently influencing other sources of revenue indirectly. Additionally, the relatively high cost of Popmart's products, coupled with theperception of toys as non-essential items, particularly during economic hardships, has further contributed to the revenue decline.Despite these challenges, Popmart is proactively pursuing geographical diversification by identifying opportunities in other countries that have strong shopping and entertainment cultures, as evident in the opening of new stores in Australia, New Zealand, and the United States. In addition, Popmart has acquired its British partner in June 2023 to further penetrate the Western market. This strategic expansion aims to leverage Popmart's substantial growth, evidenced by a Compound Annual Growth Rate (CAGR) of 140% in markets beyond Mainland China. In addition, Popmart is acquiring Moreover, Popmart is broadening its product offerings to include theme parks and mobile games, providing an immersive experience that brings characters to life and enhances consumer loyalty.